A newly proposed rule from the Federal Trade Commission (FTC) that would ban non-compete clauses is being watched closely by the healthcare industry, already strained by staffing shortages and affected by changes in ownership structure even before the pandemic.
The rule, if finalized after public comments are received for the next 2 months, would prevent employers from entering into non-compete clauses with workers and require employers to rescind existing non-compete clauses.
A non-compete clause in a contract between an employer and a worker blocks the latter from working for a competing employer or starting a competing business, the FTC noted. These agreements typically apply to a specific geographic area and period of time after a worker’s employment ends.
About one in five Americans — some 30 million people — are bound by a non-compete clause and thereby restricted from pursuing better employment opportunities, according to the FTC.
The agency went on to state that non-compete clauses prevent workers from leaving jobs and decrease competition for workers, lowering wages for all, as well as preventing new businesses from forming and stifling competition and innovation. It’s estimated the proposed rule would boost workers’ earnings between $250 billion and $296 billion per year nationally.
“The FTC rule would potentially have an effect on any industry that utilizes non-competes, and the medical industry is absolutely one of them,” said Michael Elkon, JD, partner and co-chair of the Employee Defection and Trade Secrets practice group at national law firm Fisher & Phillips, in an interview with MedPage Today.
Elkon said he sees part of the motivation behind the rule stemming from other sectors and businesses that have “done way too much” when it comes to non-compete clauses, having employees who should never have been subject to them sign one, such as lower-wage employees who aren’t developing relationships on behalf of a business and aren’t exposed to large amounts of confidential information.
However, “medical practice is very different,” he said. “It is an industry based in no small part on developing relationships [on] behalf of a business.”
For employers in the healthcare sector, there would need to be “a lot of reevaluating … if this rule actually went into effect,” Elkon said, as medical practices would have to “really think through their agreements” and “evaluate the agreements that they have in place with their physicians.”
Of course, there are two sides when it comes to non-compete clauses.
Healthcare employers may argue it’s fine to make sure lower-wage workers in other industries aren’t subject to non-competes but that it’s not OK to say that a physician making hundreds of thousands of dollars a year can’t be subject to one, he explained.
An argument might be that “patients deserve the right to pick, and non-competes deprive patients of that right to pick,” Elkon said.
The FTC’s proposed rule comes at a time when healthcare employers across the U.S. are struggling with staffing shortages. And as MedPage Today previously reported, experts have concurred that consolidation, financial pressures, changing generational perspectives, and the pandemic will continue to drive and accelerate the trend toward physician employment and away from independent practice.
Banning non-compete clauses could affect those and other areas.
Elkon noted that the FTC’s position on non-compete clauses is that they “limit innovation, depress wages, and prohibit employee mobility.” One argument to that end may be that banning non-compete clauses would be good for those looking to hire, because they would be able to hire whomever they wanted, he explained.
However, the counterargument would be that a medical practice that previously had non-competes in place and no longer does finds itself in “sort of the Wild West,” he said. Specific to physicians, an employer might have negotiated a complex employment agreement, and then an employer no longer feels it has the benefits it bargained for.
When it comes to the topic of physicians leaving independent practice, MedPage Today reported last year that restricting or banning non-compete clauses for physicians was among the solutions experts cited to help to maintain a diversity of practice.
Other proposals in the FTC’s rule included banning contractual terms that rise to the level of de facto non-compete clauses.
Examples of those could include a non-disclosure agreement that is written so broadly that it “effectively precludes” a worker from staying on in the same field after the conclusion of their employment, the FTC stated, or a contractual term that requires a worker to pay an employer or third-party for training costs if their employment terminates within a specific time period and the required payment is not reasonably related to the costs the employer incurred for training the worker.
An exception to the proposed rule is that it would not apply to a non-compete clause that is entered into by an individual who is selling a business or disposing of all of their ownership interest in a business, the FTC added, or by a person who is selling all or nearly all of a business’s operating assets, when the person restricted by a non-compete clause is a substantial owner, member, or partner at the time the person entered into the non-compete clause.
When it comes to existing state laws, the FTC stated that the proposed rule would supersede any state statute, regulation, order, or interpretation to the extent that it is inconsistent with the proposed rule.
For its part, the American Medical Association (AMA) acknowledged the relation to state laws in a statement provided to MedPage Today in an email: “The AMA appreciates the Federal Trade Commission’s examination of noncompete agreements in the workplace. While the AMA’s membership has diverse perspectives on noncompetes — with some members in an employer/practice ownership role and some in an employee role — AMA ethics policy opposes unreasonable noncompetes. Many states have enacted negotiated health care-specific noncompete statutes that take into account their unique health care markets and that balance the competing stakeholder interests. The balanced approach of these states must be considered against a proposed universal federal ban on all noncompete agreements.”
A spokesperson for the American Hospital Association (AHA), which represents members including thousands of hospitals and health systems that serve as some of the largest employers in the healthcare sector, told MedPage Today in an email that, “The AHA believes the FTC lacks authority in this area and plans to submit comments highlighting some of the shortcomings in its proposal.”
The public comment period for the proposed rule is open through March 10.
Elkon noted that there will undoubtedly be legal challenges when it comes to the proposed rule but that it remains to be seen how those legal challenges will play out.